Getting to know the exchange rate and the role of the Bank of Ghana

People often explain changes in the cedi by saying the Bank of Ghana “supplies dollars” to influence the exchange rate. This phrase shows up in commentary almost every week, but it gives a misleading idea of how the exchange rate really works.

The simple truth is that the Bank of Ghana doesn’t create U.S. dollars—it creates cedis. So when it sells dollars on the market, it’s not adding to the overall supply of dollars in the economy. It’s just shifting some of its reserves to commercial banks in exchange for cedis. And here’s the key point: those cedis are taken out of circulation.

When the Bank sells USD, cedi liquidity in the system drops. With fewer cedis around, banks and businesses have less ability to demand extra foreign currency. The pressure on the dollar eases not because more dollars appear, but because fewer cedis are competing for them.

This is the actual mechanism behind exchange-rate movements in Ghana and the role of BoG.

The idea that the cedi strengthens because the Bank “supplies more dollars” focuses on the wrong side of the market. It directs attention to the dollar, when the decisive factor is the supply of cedis. The Bank of Ghana influences the exchange rate primarily by tightening or loosening cedi liquidity — not by expanding the supply of foreign currency.

The 2025 data tells the story clearly. Over the year, growth in key monetary indicators slowed sharply. Reserve money, which was climbing at over 60 percent in March, slipped into negative territory by September. Total liquidity (M2+) growth also plunged, dropping from above 30 percent early in the year to single digits by October. Put simply, the supply of cedis was tightening.

At the same time, the cedi appreciated strongly. The exchange rate moved from about 14.1 Ghana cedis to the dollar in April to around 10.5–11.4 between August and October — a gain of roughly 30 to 40 percent. The timing was not a coincidence. As cedi liquidity tightened, demand for dollars eased, and the currency strengthened.

This episode illustrates a broader lesson: exchange-rate stability in Ghana depends far more on domestic monetary conditions than on how many dollars the central bank can put into the market   When the Bank tightens liquidity, the cedi firms; when liquidity expands too quickly, pressure on the exchange rate returns.

In short, the phrase “BoG supplies dollars” survives because it reflects what traders see during FX auctions, but it misses the deeper truth. The central bank does not strengthen the cedi by supplying dollars. It strengthens the cedi by withdrawing cedis, which reduces demand for foreign currency.

Grasping this distinction gives a clearer picture of exchange-rate dynamics and, in the end, leads to more productive policy discussions.

Source: Accra Business News